Question

Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average price of $96 ​each, and the company analysts performing the analysis expect that the firm can sell 103,000 units per year at this price for a period of five​ years, after which time they expect demand for the product to end as a result of new technology. In​ addition, variable costs are expected to be $19 per unit and fixed​ costs, not including​ depreciation, are forecast to be $1,030,000 per year. To manufacture this​ product, Blinkeria will need to buy a computerized production machine for $10.3 million that has no residual or salvage​ value, and will have an expected life of five years. In​ addition, the firm expects it will have to invest an additional $309,000 in working capital to support the new business. Other pertinent information concerning the business venture is provided here:

Initial cost of the machine	​$10,300,000
Expected life	5 years
Salvage value of the machine	​$0
Working capital requirement	​$309,000
Depreciation method	straight line
Depreciation expense	​$2,060,000 per year
Cash fixed costs—excluding depreciation	​$1,030,000 per year
Variable costs per unit	​$19
Required rate of return or cost of capital	10.1​%
Tax rate	34​%

a.  Calculate the​ project's NPV.

b.  Determine the sensitivity of the​ project's NPV to​ a(n) 12 percent decrease in the number of units sold.

c.  Determine the sensitivity of the​ project's NPV to​ a(n) 12 percent decrease in the price per unit.

d.  Determine the sensitivity of the​ project's NPV to​ a(n) 12 percent increase in the variable cost per unit.

e.  Determine the sensitivity of the​ project's NPV to​ a(n) 12 percent increase in the annual fixed operating costs.

f.  Use scenario analysis to evaluate the​ project's NPV under​ worst- and​ best-case scenarios for the​ project's value drivers. The values for the expected or​ base-case along with the​ worst- and​ best-case scenarios are listed​ here:

	Expected or Base Case	Worst Case	Best Case
Unit sales	103000	74160	131840
Price per unit	$96	$85.44	$115.20
Variable cost per unit	$(19)	$(20.90)	$(17.48)
Cash fixed costs per year	$(1,030,000)	$(1,225,700)	$(927,000)
Depreciation expense	$(2,060,000)	$(2,060,000)	$(2,060,000)

Please include E. and F. as well Thank you.

Answer 1

A) cash outflow = 10,300,000 + 309,000 = 10,609,000

Sales ( 103,000units × 96) = 9,888,000

Less: variable cost ( 103,000 × 19) = 1,957,000

Less: fixed cost. = 1,030,000

Ebitda = 6,901,000

Less: Depreciation = 2,060,000

EBT = 4,841,000

Less: Taxes (34%) = 1,645,940

Net profit = 3,195,060

(+) Depreciation = 2,060,000

Incremental cash flow = 5,255,060

Using financial calculator to calculate Npv

Inputs: C0 = - 10,609,000

C1 = 5,255,060. Frequency =1

C2 = 5,564,060. ( 5,255,060 + 309,000(work cap))    Frequency =1

I = 10.1%

Npv = compute

We get, NPV= 9,452,020.19

B)12 % decrease in number of units sold

Total number of units sold = 103,000 (1-0.12)

= 103,000 × 0.88 = 90,640 units

Cash outflow remains the same = 10,609,000

Sales ( 90,640 × 96) = 8,701,440

Less: Variable cost ( 90,640 × 19) = 1,722,160

Less: fixed cost = 1,030,000

Ebitda = 5,949,280

Less: depreciation = 2,060,000

Ebt = 3,889,280

Less: tax (34%) = 1,322,355.20

Net profit = 2,566,924.80

(+) depreciation = 2,060,000

Incremental cash flow = 4,626,924.80

Year 5 cash flow = 4,626,924.80 + 309,000 = 4,935,924.80 ( adding back of working capital

Using financial calculator

Inputs : C0 = -10,609,000

C1 = 4,626,924.80. Frequency = 4

C2 = 4,935,924.80. Frequency = 1

I = 10.1%

Npv = compute

We get, NPV = $7,076,964.10

When the number of unit decreases by 12 % Npv decreases from 9,452,020.19 to 7,076,964.10 which is around 25% .

c) when the sales price decreases by 12%

New sales price = 96 × (1-0.12)

= 96 × 0.88 = $84.48

Cash outflow remains the same

Sales ( 103,000 units × 84.48) = 8,701,440

Less: variable cost ( same as part a) = 1,957,000

Less: fixed cost = 1,030,000

Ebitda = 5,714,440

Less: depreciation = 2,060,000

Ebt = 3,654,440

Less: Taxes (34%) = 1,242,509.6

Net profit = 2,411,930.40

(+) depreciation = 2,060,000

Incremental cash flow = 4,471,930.40

Cash flow for year 5 = 4,471,930.40 + 309,000 = 4,780,930.40

Using financial calculator to calculate Npv

Inputs : C0 = - 10,609,000

C1 = 4,471,930.40 frequency = 4

C2 = 4,780,930.40. Frequency = 1

I = 10.1%

Npv = compute

We get, NPV = $ 6,490,911.30

With the decrease in sales price the Npv reduces to 6,490,911.30 from 9,452,020.19 which is around 31.33%

d) when variable cost increases by 12%

New variable cost = 19 × 1.12 = 21.28

Cash outflow remains the same as in all the parts

Sales (103,000 units × 96) = 9,888,000

Less: variable cost (103,000 × 21.28) = 2,191,840

Less : fixed cost = 1,030,000

Ebitda = 6,666,160

Less: depreciation = 2,060,000

Ebt = 4,606,160

Less: taxes (34%) = 1,566,094.40

Net profit = 3,040,065.60

(+) depreciation = 2,060,000

Incremental cash flow = 5,100,065.60

Cash flow for year 5 = 5,100,065.60 + 309,000 = $5,409,065.60

Using financial calculator , to calculate Npv

Inputs : C0 = - 10,609,000

C1 = 5,100,065.60 frequency = 4

C2 = 5,409,065.60. Frequency = 1

I = 10.1%

Npv = compute

We get, NPV = $ 8,865,967.39

with the increase in variable cost there is approximately 6.20% decrease in Npv.